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In my many years of advising couples and individuals on how to achieve an equitable divorce, I have seen antics on both sides that can only be described as “the good, the bad and the down-right ugly.” It is unfortunate, but true, that couples embarking on divorce sometimes behave badly during the process. Many professionals who work in this space say, “divorce can bring out the worst in otherwise good people.” I would have to agree.
So, if you are considering divorce or have started the process, you may want to watch out for a number of red flags that could indicate bad behavior on the part of your spouse may be taking place or is about to.
Keep in mind, these red flags can occur even before the decision to get a divorce has been made. Marriages typically start to fall apart months, sometimes years before most couples seek counseling and before the word “divorce” ever comes up. Yet, marriage problems can trigger perceived threats and acts of self-preservation at the expense of one spouse — some of which may be unlawful.
Here is a list of red flags to look for:
- Removal of financial documents from the home, or the sudden, unusual interest in such documents and where they are stored
- Closing or opening bank accounts
- Opening of online bank accounts or moving financial statements to online only
- Unusual or unexpected financial information on income tax forms
- New lines of credit being opened or new credit cards appearing
- Unexplained charges on credit card statements
- Moving of funds
- Staying away from home
- Wanting you to sign documents you don’t understand
- Having important financial statements sent to a work address
None of the above activities prove that bad behavior is taking place. They simply are clues to where bad behavior may show up. In fact, each spouse should have a thorough understanding of the couple’s marital financial picture, regardless of the status of the marriage. Here is a list of steps you can take to make sure you are current on your marital finances and have your own copies of all pertinent financial documents:
- Find and review the last several months or years of all bank and financial statements — investment accounts, retirement funds, mortgage statements; make copies of these and all other pertinent documents and store in a safe place;
- Order credit reports on you and your spouse;
- Gather and copy proof of income for your spouse — especially if he or she is the owner of a private business;
- Make copies of the last 3-4 years of your income tax forms and supportive documents; store in a safe place;
- List all marital debts, then find and copy documentation;
- If you’ve recently refinanced your home, make copies of all the paperwork and store safely;
- Visit your safe deposit box and take photos of all contents; make copies of important papers and store safely;
- If you brought separate property into the marriage — savings accounts, investments, retirement accounts from former or current employers, real estate, collections of high value such as art, for example — document it with financial statements and receipts showing ownership of these assets before you were married.
I sometimes meet with clients who anticipate divorce to go over a couple’s complete financial situation. Since I’ve been trained in divorce law in Texas, I can often provide insight into what clients can reasonably expect with regard to a divorce settlement — if we have all the financial information we need. Most importantly, we can explore how to divide assets and debts in a way that meets the unique financial needs of each spouse. This exercise usually proves to be a valuable and insightful reality check.
Divorce can be a long and arduous process once it gets started. If you can buy some time before you file, doing your homework ahead of time may produce big dividends. Read books and learn all you can about the divorce laws in your state. Timing your divorce may also be financially wise.
Meeting with a Certified Divorce Financial Analyst such as myself also can provide you with a deeper understanding of divorce finances and how to better approach your situation. Even meeting with an experienced divorce attorney for a consultation can be invaluable before you start the process. Ask lots of questions of these experts and start developing your divorce strategy and long term goals.
It is very important to gather and make copies of all your marital financial documents including bank statements, investment and retirement accounts, credit reports on yourself and your spouse, mortgage statements, receipts for large purchases, income tax returns for the last 3-5 years, etc. Other documents to copy include loan applications, wills, trusts, brokerage statements, credit card statements, deeds to real property, car registrations, insurance inventories, and insurance policies. Also, copy records of your separate property, such as an inheritance or gifts from your family. These assets will remain yours as long as you can document them. Copies of your spouse’s business records also can show where hidden assets may be hiding.
Photograph everything in safe deposit boxes and home safes, as well as expensive household items and collections. Get appraisals if appropriate. Remember you own half of everything purchased during the marriage — even if something is “in his name.” If you don’t ultimately want an asset, your attorney can use its value to secure possession of something you do want in the settlement.
You may also want to repair your car and get new tires, get medical procedures done for yourself or your children, purchase some new clothes, get training or take some college classes if you’ll be looking for a job.
One significant shift will likely occur once you file for divorce. The income you’ve been living on for one household must now support two. This will put a demand on resources immediately. Start early to save what cash you can to get you through the process. If you and your spouse have a jointly held savings account, consider withdrawing a percentage of the cash and putting it into a new separate account before you file. (You will still be accountable for it, but you are making sure it’s safe and available to you if you need it.) Legal fees are typically considered community debt, so putting them on a credit card may also help you retain cash reserves.
Given the complexities of today’s financial landscape, it may be in your best interest to consider securing specific expertise to help you sort out and evaluate the financial aspects of your divorce. One important thing to remember is that most family law attorneys, even when experienced in divorce, are not trained to address financially complicated divorce issues.
As a key participant in your divorce process, you will want to understand all financial aspects of your marital estate and have an informed voice in decisions made with regard to your settlement agreement. So, securing this expertise either from a Certified Divorce Financial Analyst or a Forensic CPA can be invaluable.
Based on my more than 14 years helping clients with their divorce finances, I recommend starting with a Certified Divorce Financial Analyst (CFDA) because they are specifically trained in divorce finances, and they are generally less expensive than a Forensic CPA. Forensic CPAs may be best suited to perform complex business evaluations and deep financial investigations. When evaluating the credentials of a Forensic CPA, make sure he or she also has experience with the divorce process and laws of divorce in your state. Here are a number of areas where CDFAs and CPAs can help you:
- Reviewing and excavating personal tax returns
Lots of financial information can be gleaned from income tax returns. Yet, to the untrained eye, important clues can easily be overlooked or missed in this treasure trove of information. Tax returns can shine light on:
- Real Estate Holdings — residential, commercial and vacation properties
- Trust accounts, including the distribution details
- Over-payment of taxes (that can be withdrawn in the future or applied to future years)
- Tax refunds due
- Securities accounts
- Bank accounts (online or otherwise)
- Partnerships or business interests
- Losses that can be claimed in future years
- Business Valuation
If a family-owned business is part of the marital estate, an experienced CPA who is a trained business valuator may be critical in determining the company’s value for the purposes of a divorce. Often, a family business is the couple’s most valuable asset. However, such businesses may not be large enough to merit the expense of a CPA’s fees, which can run from $30,000 and up. In addition, if the owner’s specific skills and training represent most of the value of the company, there is little to divide in terms of divorce assets. The value there is called “professional goodwill.”
- Financial Investigations
I sometimes help clients distinguish between separate and community property if accounts have been co-mingled over the years. This involves tracing of deposits and withdrawals that are typically found in account records and financial statements. Sometimes when couples are seeking divorce, one of the spouses will claim his or her earnings have decreased, affecting marital cash flow. A Forensic CPA or a trained CDFA can be called in to review key financial documents, expenditures or other records in order to verify or counter such a claim.
- Retirement Plan Reviews
Both individual and company sponsored retirement plans should be carefully reviewed in order to define an equitable division of these assets to the divorcing spouses. Many times, Forensic CPAs or CDFAs will discover retirement plans that were not previously disclosed. This is often the case for high level corporate executives today who may hold “excess” benefits plans. Over the past five years, the stock market has increased dramatically along with the complexity of associated retirement plans. Close scrutiny of this area and knowing what questions to ask and who to ask has the potential of turning up some surprises.
- Tax and financial advice in the settlement process
The vast majority of divorces today end in a negotiated settlement between the spouses. Consequently, courts are rarely involved. So, close scrutiny of tax and financial aspects of these cases by experts is extremely important. Each spouse must understand how the settlement will affect future cash flow, income tax ramifications, retirement fund considerations and related asset transfers, and other financial factors. Securing the expertise and guidance of one of these financial pros will likely impact your finances for the rest of your life and is often well worth the investment.
As a trained and experienced CFDA, I focus on helping individual going through divorce to secure an equitable division of the marital assets. I’ve found my training and experience in finances and mediation are very helpful, but what is often most important to my clients is seeing how their settlement will work out for them 15-20 years from now. That is often a real eye-opener and a game changer.
1. Myth: Assets are always divided 50/50
Fact: Texas divorce law does not support the common belief of splitting marital assets 50/50
The State of Texas requires a “just and equitable” division of property. A 50/50 settlement is rarely appropriate and should never be implemented without expert advice, and ideally, using an analysis of the situation by a Certified Divorce Financial Analyst. The division of marital assets in a divorce should take into account the need for one spouse to receive sufficient assets to provide support considering the much higher earnings of the other party.
2. Myth: There is no alimony in Texas
Fact: There is a form of alimony in Texas
Court-ordered, spousal support, what most people call alimony, is very limited in Texas. It is referred to as spousal maintenance, and a spouse must meet strict requirements to qualify. Be prepared to provide a detailed, projected post-divorce budget that demonstrates a clear monetary need if you plan to apply for spousal maintenance. And, prove that you are unable to work and earn a modest income.
However, one may be able to negotiate contractual alimony from a spouse that goes beyond what the law allows. A Certified Divorce Financial Analyst can assist in the preparation of this budget. Often the higher earning spouse receives more assets as an offset in exchange for providing alimony. There are also potential income tax advantages for the higher earning spouse that may make this arrangement especially attractive.
3. Myth: Every asset of a divorcing couple is divided equally between the spouses in a divorce
Fact: For an equitable divorce to occur, marital assets should be divided based on the unique needs of each couple’s situation
There are no specific laws that require courts to equally divide each marital asset. In fact, there are many ways to “slice and dice” marital assets in a divorce. I often tell clients that a dollar invested in a 401(k) is not equal to the value of a dollar in home equity. Funds invested in retirement plans offer the potential for growth and cannot be withdrawn before a certain age. The potential for home equity assets to grow depends largely on the marketplace and often, the economy. Also, homeownership comes with related costs of maintenance, repairs, utilities and property taxes. Each marital asset should be examined carefully in light of each recipient’s financial situation and goals. Once assets are “valued,” they are tallied for each spouse, and then divided, often with “offsets” which balance the division of assets according to each situation.
4. Myth: The assessed value put on a home by your local property tax authority is a reliable measure of its value
Fact: Divorcing couples would be wise to secure a home appraisal from a reputable, licensed professional
Your municipal property tax authority is not a reliable source in determining your home’s market value. In addition, homeowners are often pretty far off base in guesstimating the value of their own property. Especially if they have invested heavily in repairs and upgrades and expect to get this investment back when they sell. In family law cases, it is preferred that divorcing couples get property appraised by a qualified appraisal company. If the appraisal comes back and one spouse disagrees with the number, get a second appraisal from a different company and meet in the middle. If they mutually agree to do so, Couples may also get a market valuation from an experienced realtor in the neighborhood who will calculate its market value based on similar comparables in the that have recently sold in the area.
5. Myth: “I can nail him if he has a girlfriend”
Fact: Not likely, most of the time
While there seems to be an endless appetite for news stories about infidelity involving celebrities or those in positions of power, in most cases divorce courts couldn’t care less if your spouse is having an affair. This is because in states with no-fault divorce laws such as Texas – – which allow people to divorce without having to document specific reasons the marriage went south — courts aren’t looking for blame. So affairs and other disasters of the heart don’t matter. With that said, the case could be impacted on some level if the judge assigned to your divorce has strong attitudes one way or another about such things. (Although less than 10% of cases are decided by a judge). Also, if the spouse having the affair wants to keep it quiet, a larger settlement may be possible, but not probable. Now, if the offending spouse is “wasting” a significant portion of community assets on their new love and you can produce proof in the way of receipts to that effect, there are laws against such activity, but only up to recovering your share of those assets.
For more information on any of the topics above, contact me at firstname.lastname@example.org.
In many divorces, couples end up selling the family home — before, during or shortly after the divorce — in an effort to practically adjust to post-divorce lifestyles and expenses. In order to avoid paying federal income tax on the gain on a home sale, divorcing couples should explore their options — preferably before the divorce is final — to use the federal income tax exclusion.
Depending on very specific criteria and the unique situation of each divorcing couple, this option could potentially offer a significant financial advantage — if the timing works in their favor and they agree to some advanced planning to accommodate the qualifications.
The sales gain exclusion rules apply strictly to the sale of a couple’s primary residence, as opposed to the sale of a vacation home or other real estate. The exclusion (no federal income tax is owed) for an individual, applies to the gain on a home sale up to $250,000. A married couple, filing jointly, can exclude up to $500,000 of gain on a home sale. However, to qualify for the exclusion, a seller must have owned and occupied the property as a principal residence for at least two years during the same five-year period. To claim the $500,00 exclusion for a couple, at least one spouse must pass the ownership test, and both spouses must pass the use test. Here are two examples:
Home sale occurs before divorce:
If a soon-to-be divorced couple meets the qualification rules above, sells their primary residence, and are still legally married at the end of the year of sale (because their divorce is still not yet final), they can claim the $500,000 exclusion. They can claim the full amount, if they file a joint return, or if they file separate returns, using married filing separate status, each spouse can exclude up to $250,000 of his or her share of the gain. Again, to qualify here, each spouse must have owned his or her share of the home for at least two years during the five-year period prior to the sale date, and used the home as a principal residence for at least two years during that period.
Home sale occurs in year divorce is final or shortly thereafter:
When a couple is divorced in the same year their home is sold, they are divorced for that entire year according to the IRS. Therefore, they cannot file income tax returns jointly. However, if both spouses meet the required ownership and residency requirements as stated above, each spouse can exclude $250,000 of their respective shares of the home sales gain when they file separately.
If one spouse ends up with sole ownership of the home after divorce, then sells it, he or she can only exclude $250,000 of the sales gain as an individual. However, if the single spouse remarries, and lives in the home with a new spouse for at least two years before selling it, the couple may qualify for the $500,000 sales gain exclusion, if they file their income taxes jointly.
If your situation falls outside of the above examples, I recommend consulting with a Certified Divorce Financial Analyst such as myself for a closer examination of the potential for making this exclusion work for you.
Couples facing divorce may want to explore a relatively new option for legally ending marriage in Texas called collaborative divorce. This approach emphasizes cooperation over confrontation, and problem-solving over grievance-airing. It was developed as a way to minimize conflicts and the emotional anguish of a traditional divorce process, especially when children are involved.
In a collaborative divorce, each spouse is assisted by a lawyer so they have the benefit of individual counsel. The divorcing parties and attorneys agree to cooperate fully in providing full disclosure of all financial information, and to produce whatever documentation is requested by the other party. The attorneys commit in writing to act honestly and professionally, and to treat the other attorney and client with respect and dignity.
All negotiations take place during four-way meetings with both parties and their lawyers, and sometimes other professional experts. Attorneys draft legal documents, guide settlement meetings and strategize with their clients. Frequently, a divorce financial analyst like myself, is part of the team and becomes a neutral financial professional in order to help work out the nitty-gritty of the monetary settlement. The neutral financial professional is crucial when the parties have substantial assets, providing an unbiased view of the financials. The financial professional also provides the team with tools to clarify the couple’s financial situation — creating spreadsheets, charts and graphs that are often very useful in illustrating the big picture in black-and-white.
In practice, the concept of the collaborative law used in divorce is the opposite of almost everything typical divorce attorneys have been trained to do. It requires a definite shift in an attorney’s mindset and methods to successfully handle a case collaboratively. The differences between collaborative divorce and a typical divorce can be profound.
In the collaborative process, while couples may not always agree on everything, they are encouraged to try to understand each other’s needs, interests and point of view. This is designed to enhance trust, reduce hostility and facilitate a settlement that works for everyone.
The collaborative divorce process is designed to provide more privacy, client control, and transparency; this process also strives to minimize post-divorce conflicts and aids in preserving family relationships, protecting the children, and allowing creative settlement solutions.
In order for this approach to be meaningful, effective and fair, both spouses should have relatively equal “bargaining power,” and should not be overly emotional, angry, fearful or intimidated by the other. This option also may not be appropriate for the mentally or emotionally incapacitated, or anyone struggling with substance abuse or domestic violence. In addition, full disclosure is required and both individuals must be fully informed of all relevant issues – i.e. legal rights, assets and liabilities, etc.
One significant drawback to the collaborative approach occurs if the process breaks down and the couple cannot agree on a settlement. Both collaborative attorneys who worked on the case must withdraw and each spouse must hire a new attorney — essentially going back to square one. This is likely to prolong the divorce process and increase costs.
Negotiating an equitable divorce agreement can be complicated. There are many issues to consider. In my experience, an often neglected or overlooked area is the insurance needs of both individuals, post-divorce.
Both individuals will likely need medical, automobile, homeowner’s/renter’s, life and ideally, long-term care insurance. And if there are any children involved, their insurance needs should also be closely considered.
The crisis in medical insurance coverage in the United States continues to be a political hot potato. Just as millions of Americans were settling into plans and coverage under the Affordable Care Act (ACA), another presidential election has turned this entire issue upside down once again. And at this writing, no one knows what will happen next as the Congress debates repealing the ACA. For this reason, I am recommending that those who stand to lose their medical coverage after divorce because they were covered under a spouse’s plan, sign up for a COBRA extension with their spouse’s healthcare insurance provider. Under Texas divorce law, this will offer medical coverage for up to 36 months following divorce. Now, COBRA can be expensive, so make sure you consider this as part of your settlement agreement, if possible. The 36 months should give you ample time to secure a job for yourself that offers medical insurance.
Minor children must be covered under Dad’s medical insurance. If mom’s coverage is best, then the cost of that coverage is added to the child support payment.
Addressing the possibility that you could require long-term care is an important part of retirement planning. Yet, too many people hope for the best and don’t give this much thought. Our rapidly aging population, lengthening longevity and unpredictable health care costs highlight the need for long-term care insurance. So, couples getting a divorce should definitely explore getting long-term care insurance.
Statistics show that 70 percent of those who reach age 65 will need long-term care at some point before they die. In addition, many people should realize that Medicare does not cover long-term care. And Medicaid only kicks in when you’ve exhausted most of your assets. It is also quite possible that these two institutions may also face changes under the current administration.
For these reasons, considering some method of long-term care insurance or savings has become a key strategy for preserving assets, especially for women. So, adding a line item in your agreement for this coverage might be worth fighting for. Also, do your homework on plans, features and companies; read and understand the fine print of policies; and choose a reputable company.
For those who haven’t yet bought a long-term care policy, keep in mind that premiums for long-term care insurance increase as you age. And since there is a discount for purchasing while married — no one checks to see if you remain married — it is in your best interest to establish coverage prior to a divorce settlement.
If you are considering divorce in 2017, you are probably dreading the approaching holidays. Let’s face it, no one wants to acknowledge marital discord when the theme is “joy” and “good cheer.”
As the New Year approaches, you may want to consider focusing now on preparation and planning for what lies ahead. Here are some steps you can take before and during the holidays that will lay the ground work for a more productive process. If you simply don’t have time or can’t face the prospect of divorce now, do what you can and keep this list handy for action when the holidays are over.
- Set a budget for gift-giving; avoid creating new debt or spending down savings.
- Begin gathering and making copies of all your household financial documents for the discovery process. Consider getting a credit report on yourself and your spouse.
- Take photographs of everything in your house, inside the closets, drawers, the garage and even your safe deposit box, and date each image. Take extra care in photographing valuable collections, if accessible. Store the images in a safe location, possibly online. If items start to disappear as you move through divorce, you have a record of the items.
- Reach out to old friends and those with whom you have lost contact. It’s time to start rebuilding your social connections and network.
- Consider engaging a certified divorce financial analyst to help you prepare for the often complicated financial side of divorce. He or she is specifically trained to help you compile a list of assets and debts, get answers to financial and tax questions, consider equitable settlement arrangements and develop a realistic post-divorce budget.
- Practice self-care. Schedule a massage or a pedicure/manicure. Take walks or try yoga. Meditate. Watch your diet and alcohol consumption. Staying healthy will help you make better decisions in the weeks and months ahead.
- Every day, write down one thing for which you are grateful and why. If you keep the list on your computer, it’s easy to update each day. This will help you maintain perspective and a more positive attitude.
Put the divorce on the back burner during the holidays, if you must. But remember it is still simmering there and will soon require your full attention. Keep up appearances, but take care of yourself and start preparing for what lies ahead. You want to be ready to proceed on your path to becoming a healthy, well-adjusted single in the New Year.
If you are beginning a new chapter in your life with a spouse or partner, jointly managing your money may be the last thing on your minds. But it should be one of the first things you both consider as you begin to direct your separate finances into a financial plan for the future.
Depending on your ages, here are two lists of financial areas that need attention as you begin to plan your life together. I would advise focusing on the A-List first and then, tackling the B-List.
- Creating a household budget
- Bank accounts
- Housing Options Analysis
- Saving for retirement or other goals
- Insurance needs analysis
- Debt management
- Educational funding analysis
- Income tax planning
- Long term planning (20-year spreadsheet)
- Estate planning
- Long-term care insurance
- Real estate investments
- Social Security
A significant, initial financial consideration will likely be determining where you are going to live. What with today’s low interest rates, buying a house may sound like the best option, yet careful consideration of this option is important. This purchase is a very large investment. Compare the costs/benefits of renting as opposed to buying.
Do you have enough cash for a down payment — usually at least 20 percent of the home’s cost? Can you qualify for a mortgage loan based on your credit history and income level? Also, consider each of your careers: do you anticipate or is it possible an employer could move either of you to another city, state or even overseas in the near future? Are you planning a job change, or will you be starting a family soon? What’s the real estate market like in your area — is it a seller’s market, or a buyer’s market? Do you fully understand all the costs of home ownership — mortgage payment plus property taxes, insurance, maintenance and repairs, utilities, association fees, etc.? Even if you can potentially “afford” a home purchase, will you end up being “house poor” and short on savings?
By working with a Certified Financial Planner like myself, couples can get answers to these and other questions, as well as develop a comprehensive and realistic household budget which will provide them with a foundational tool for effectively managing their financial future and meeting their goals.
For more information on planning your financial future with a spouse or partner, visit my new website, http://www.moneyandmatrimony.us.
If you and your spouse are considering, or are in the process of divorce, and one or both of you has a corporate or civil service pension, understand that all pensions are not created equal. And, that fact is extremely important to consider as you proceed, hopefully, toward an equitable division of your marital estate.
In dividing these benefits in a divorce, your attorneys will likely draft a QDRO document, or Qualified Domestic Relations Order, to initiate payment(s) to either or both of you from these plans, depending on your mediated settlement agreement (MSA) and/or divorce decree.
The federal government requires some unique wording to be used in QDROs drafted with regard to civil service pensions. And the specific requirements can get complicated quickly. Often, divorce attorneys are not trained in this area, and couples or individuals could end up redoing the QDRO several times to “get it right,” if not completed correctly in the first place. As mentioned previously, there are several unique aspects to consider when drafting the specific wording of a QDRO when civil service pensions are involved. Here are some to be aware of:
The following four areas of a civil service pension must be addressed separately in the QDRO: any Retirement Annuities, lump sum payments, Survivor Annuities and Thrift Savings Plans.
While a corporate pension is normally a stable payment for the lifetime of the individual, a civil service pension has an inflation adjustment tied to the consumer price index. This means the individual with the civil service pension stands to get more money over the long-term.
In one divorce case, the wife, a teacher had earned an annual $50k TRS pension; her husband, an annual $75k civil service pension, based on his years with NASA. The wife was adamant that she receives one-half of his pension and he receives one-half of hers. This way she could participate in the cost-of-living adjustments that were offered by the husband’s plan. She was wise to request this method of handling the pensions, since the TRS pension provides limited cost-of-living adjustments.
In a corporate pension plan, the decree or agreement incident to divorce must clearly state the percentage going to the non-employee, and an “as of” date. However, civil service requires much more detail in the decree and MSA, so that those two documents and the QDRO agree on treatment of the pension at death and other issues.
In instances like those described above, my advice would be to secure the assistance of a certified divorce financial analyst (CDFA) to help in drafting QDROs so that all specific requirements are met. Better yet, engage the CDFA early in the divorce process so you can start working out the civil service QDRO details before the MSA and/or divorce decree is signed.
Join me at upcoming 2017 Guide to Good Divorce seminars in Houston on January 28, April 29, July 29, and September 28. Click here for more information on divorce financial planning or divorce mediation.
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Patricia Barrett CFP CDFA
Address: 10777 Westheimer, Suite 1100, Houston, TX 77042